Higher Saudi Growth Spurs Sabic Credit Risk Drop: Arab Credit

By Glen Carey -
Dec 25, 2012

Saudi Basic Industries Corp. (SABIC)’s
credit risk is poised for the biggest monthly drop in almost a
year as the world’s biggest petrochemicals maker by market value
benefits from higher Saudi economic growth expectations.

Five-year credit default swaps for the state-owned company
known as Sabic have decreased 10 basis points this month, the
most since February, to 102 yesterday, according to data
provider CMA. That compares with 116 for Dow Chemical Co., the
world’s third-biggest publicly traded chemicals maker.

Saudi Arabia’s economy expanded 5.6 percent this year, the
second-fastest pace in almost a decade, according to the median
estimate of 16 economists compiled by Bloomberg this month.
That’s up from an earlier forecast of 5.1 percent as the world’s
top oil exporter pursues more than $500 billion of investments
in areas including industry and petrochemicals. The kingdom’s
credit risk almost halved this year to 69, the lowest in the
Middle East and below similar-rated Japan.

“International companies are comfortable with the current
risk in the Saudi market and don’t have to buy insurance for
their investments, which is what is pushing the credit defaults
swaps lower,” Abdulwahid Al-Matar, head of trading at Riyadh-
based Saudi Hollandi Bank (AAAL), said by phone on Dec. 23. “Sabic is
the closest thing to sovereign debt that we have.”

Big Reserves

Saudi Arabia has built up its reserves this year as the
price of Brent crude, the benchmark for more than half the
world’s oil, averaged $112 a barrel, almost unchanged from 2011.
Net foreign assets held by the central bank jumped 21 percent in
the year to October to 2.35 trillion riyals ($627 billion) --the
third-highest for any country after China and Japan, according
to data compiled by Bloomberg.

Lending rates advanced the most in the six-nation Gulf
Cooperation Council in 2012 as government spending spurred
annual loan growth to businesses to 15 percent in October, the
highest in almost four years.

New Plants

The three-month Saudi interbank offered rate, the benchmark
used by banks to price loans, gained 22 basis points this year
to 0.995 percent yesterday, near the highest since April 2009,
according to data compiled by Bloomberg.

Sabic, 75 percent owned by the government, is building a
$3.4 billion specialty-elastomer plant with ExxonMobil Corp. on
the Persian Gulf coast that’s set to produce 400,000 tons of
rubber product a year when it starts in 2015. The yield on the
chemical-maker’s 3 percent bonds due November 2015 has dropped
112 basis points, or 1.12 percentage points, this year to 1.78
percent today, according to data compiled by Bloomberg.

Still, Sabic’s 2012 profit is set to decline 13 percent,
the first annual retreat in since 2009, to 25.3 billion riyals,
the average estimate of 14 analysts compiled by Bloomberg shows.
“Weak demand for polymers and key derivatives, mainly on a
structural slowdown in China, and strong volatility in oil and
feedstock prices” were behind the decline, Ahmed Shams El Din,
Cairo-based director of equity research at EFG-Hermes, said by
e-mail.

Attracting Investments

A pick up in the U.S. chemicals industry on the back of
shale gas may test the long-standing competitive advantage that
Sabic has enjoyed from its proximity to the world’s largest
conventional oil reserves, he added. “The impressive turnaround
in North America’s shale gas economics is providing U.S.
producers’ with a significant cost advantage stemming from their
access to cheap ethane gas,” Shams El Din said.

Investor appetite in the kingdom’s assets has heightened as
the nation emerges mostly unscathed by the political unrest that
swept across the Middle East and North Africa since the so-
called Arab Spring started two years ago.

Egypt’s credit risk jumped 100 basis points this month, set
for the biggest monthly advance in a year, to 491 basis points
yesterday. Political clashes between the country’s Islamist
government and its opponents in the past month led to a delay in
the approval of an International Monetary Fund loan. In Syria,
more than 44,000 people have been killed since the conflict
started in March 2011, according to the U.K.-based Syrian
Observatory for Human Rights.